Gurkha veterans who have served four years with the historic regiment will be told tomorrow that they will be allowed to settle in the UK. The home secretary is expected to reverse government guidance issued last month that made the obstacles to entry almost insurmountable for ordinary Gurkha soldiers traditionally recruited from Nepal.

It is understood that Jacqui Smith will announce rules that will allow entry into the UK for Gurkhas previously excluded because they retired from the regiment before 1997, provided they have fought for the British army for at least four years.

Keith Vaz, chairman of the home affairs select committee, wrote to the prime minister on Tuesday saying the government should immediately approve the 1,400 outstanding applications for settlement, whether they meet new criteria established by the Home Office or not.

In a reprimand to the government, Vaz said: "The figure of 100,000 ex-Gurkhas including dependants publicly cited by the government as likely to take up settlement is clearly much overblown."

The prospective turnaround in policy came after the Labour government suffered its first big defeat last month by 21 votes, as 27 Labour rebels joined the Tories and Liberal Democrats in demanding equal residency rights for all Gurkha soldiers after a high-profile public campaign.

In an indication of the imminent policy volte face, Gordon Brown said at prime minister's questions that he had a "great deal of sympathy and support" for Gurkhas who wished to live in the UK. He said: "I believe it is possible for us to honour our commitments to the Gurkhas and to do so in a way that protects the public finances. That will be part of the announcement that is made tomorrow."

The Vaz letter to the prime minister followed a private round table discussion between Gurkhas and their campaigners and the government on the issue. The committee urged the government to "use our conclusions as a catalyst to announcing a much-needed change in policy".

He said the prospective benefit to the UK economy by the ex-Gurkhas was agreed by all to be high, both in terms of skills and economic power and in visa application fees. The committee had heard no evidence of a threat to future recruitment of Gurkhas to the British army in Nepal.

Martin Howe, one of the lawyers representing the majority of Gurkhas fighting for settlement, said: "We hope that the Gurkhas will be entitled to settlement if they have four years' service. We understand that this will be reviewed in four years time. If this is the case, we will be delighted and thankful."

David Enright, another Gurkha lawyer, said: "We think it's more or less a fait accompli but we have had several false dawns before ... I'm not going to celebrate until I know for sure."

Earlier this month, actor Joanna Lumley extracted concessions from the home office minister Phil Woolas live on television. Five Gurkhas had been sent letters telling them that they did not qualify for admittance to the UK a day after Brown had promised that the former solders' cases would be reviewed. Brown had not known about the letters and was only informed of their existence by Lumley.